Case No: No. 2957 of 2005
Neutral Citation Number: [2006] EWHC 832 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 12th April 2006

Before :

SIR FRANCIS FERRIS

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IN THE MATTER OF MCCARTHY SURFACING LIMITED
IN THE MATTER OF THE COMPANIES ACT 1985

Between :

	(1)  TERENCE HECQUET
(2)  ROBERT HOARE
(3)  ROBERT MARSDEN	

Petitioners	
	-  and  -		
	(1)  TOM MCCARTHY
(2)  MALCOLM MCCARTHY
(3)  EDWIN MCCARTHY
(4)  MCCARTHY SURFACING LIMITED	

Respondents	

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Mr. David Chivers QC and Mr. Edward Davies (instructed by Pettman Smith of 79 Knightsbridge, London SW1X 7RB) for the Petitioners
Mr. Mark Cunningham QC (instructed by ASB Law of Claremont House, 95 Queen’s Road, Brighton BN1 3XE) for the First, Second and Third Respondents

Hearing dates: 2nd and 3rd March 2006
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Judgment
Sir Francis Ferris: 
1.	The matter which I have to decide comes before me as a preliminary issue in a petition under Section 459 of the Companies Act 1985.  The issue is whether the petitioners named in the petition have the requisite standing to maintain the petition.
2.	The question is one of law, but it is necessary to state some of the background facts, which are not in dispute.
(1)	McCarthy Surfacing Ltd (“the Company”) was incorporated in 1985.  At all material times its share capital has been £100 divided into 100 shares of £1 each, all of which have been issued and are fully paid.
(2)	The business of the Company is road surfacing and it has been very successful commercially, producing substantial profits.
(3)	Originally the Company had four shareholders, namely Mr. Tom McCarthy and his brothers Malcolm and Edwin (who are the first three respondents) and Robert Hoare (one of the petitioners).  In February 1989 they were joined by Terence Hecquet, the first petitioner, and the shareholdings were adjusted so that each of them held 20 shares.  The five of them were also the only directors of the Company.
(4)	By article 7 of the Company’s articles it is provided that
“The Directors may, in their absolute discretion, and without assigning any reason therefore, decline to register any transfer of any Share, whether or not it is a fully paid Share.”
(5)	From late in 1992 tensions developed among the five shareholders.  The details do not matter for present purposes and I have not been told much about them.  It is sufficient to say that Mr. Hecquet and Mr. Hoare sided with each other against the other three shareholders.  On 19th October 1994 Mr. Hecquet and Mr. Hoare presented a petition under Section 459 of the Companies Act 1985.
(6)	In relation to the dispute and the petition Mr. Hecquet and Mr. Hoare were advised and assisted by Mr. Robert Marsden, a financial adviser, who is the third petitioner.
(7)	The petition was unsuccessful and was dismissed.
(8)	On 14th October 1996 Mr. Hecquet and Mr. Hoare each executed a transfer of his shares to Mr. Marsden.
(9)	On 12th November 1996 Mr. Marsden submitted the transfers to the Company and asked to be registered as a shareholder.  At a meeting on 21st November the directors of the Company decided not to register the transfers and Mr. Marsden was informed of this by a letter dated 21st November 1996.
(10)	On 9th February 1998 a bankruptcy order was made against Mr. Hoare and on 27th February 1998 a similar order was made against Mr. Hecquet.  In the case of Mr. Hoare the official receiver and in the case of Mr. Hecquet his trustee in bankruptcy subsequently purported to sell their shares in the Company to Mr. Tom McCarthy, the first respondent.
(11)	Subsequently Mr. Hecquet and Mr. Hoare obtained their discharge from bankruptcy.
(12)	Mr. Hecquet and Mr. Hoare remain the registered shareholders in respect of the shares which they held before the disputes arose.
(13)	On 6th May 2005 the petitioners, that is to say Mr. Hecquet and Mr. Hoare and Mr. Marsden, presented a new petition under Section 459.  This petition, in which the preliminary issue which I have to decide arises, is based upon an alleged failure on the part of those in control of the Company to consider making distributions to shareholders.
3.	I must begin by setting out the material parts of Section 459, which are as follows:
“459	Order on application of company member
(1)	A member of a company may apply to the court by petition for an order under this Part on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
(2)	The provisions of this Part apply to a person who is not a member of a company but to whom shares in the company have been transferred or transmitted by operation of law, as those provisions apply to a member of the company; and references to a member or members are to be construed accordingly.”
4.	Those entitled to petition by virtue of subsection (1) are the members of the company.  The term “member” is defined in Section 22 of the Act as follows:
“22  (1)	The subscribers of a company’s memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as such in its register of members.
(2) 	Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company.”
5.	Those who are not members within this definition can petition under Section 459 only if they come within subsection (2).  This subsection embraces two categories namely (i) persons to whom shares have been transferred and (ii) persons to whom shares have been transmitted by operation of law.  Category (ii) is not relevant to this case.  It includes persons such as trustees in bankruptcy or personal representatives who have become entitled to shares in that capacity but have not had their names entered in the company’s register of members.  Category (i) is self explanatory.  It consists of persons in whose favour a transfer of shares has been executed.  By definition they must not yet have had their names entered in the register of members.  Subsection (2) applies only to “a person who is not a member of a company”, that is to a person who does not have standing to petition by virtue of subsection (1).
6.	The petitioners submit that this somewhat basic analysis of the Section provides the complete answer to the challenge to their standing.  Mr. Hecquet and Mr. Hoare have standing because each of them remains a member of the Company within the definition in Section 22 and is thus within Section 459(1).  Mr. Marsden has standing because, while he is not a member, he has received a transfer of shares and is thus within Section 459(2).
7.	The respondents originally challenged the standing of the petitioners on the basis that they did not admit the “authenticity or legitimacy” of the Transfers in favour of Mr. Marsden and, on the footing that there had been no effective Transfers, they relied upon the vesting of the shares owned by Mr. Hecquet and Mr. Hoare respectively in the official receiver or trustee in bankruptcy.  The preliminary issue was ordered to be tried at a time when this was the nature of the challenge.  The respondents have subsequently changed their stance.  They now proceed on the footing that the Transfers were effective, although, somewhat unsatisfactorily, they have admitted this only for the purpose of the trial of the preliminary issue.  Their case before me is based on the argument that the analysis of Section 459 on which the petitioners rely is incomplete.
8.	On behalf of the respondents Mr. Cunningham argued that there are two aspects to the concept of standing for the purposes of Section 459, which he described as “formal” and “substantive” respectively.  The petitioners’ argument proceeds on the basis that  all that is required is formal standing.  In truth, said Mr. Cunningham, what is required is substantive standing as well.
9.	Mr. Cunningham sought to derive the requirement of substantive standing from the words of Section 459 which require that a petitioner shall show that the company’s affairs “are or have been carried on in a manner which is unfairly prejudicial to the interests of its members generally or some part of its members (including at least himself)”.  The analysis relied upon by the petitioners ignores the fact that the purpose of Section 459 is to remedy unfair prejudice to the interests of the member or transferee presenting the petition.  Here, he claimed, neither Mr. Hecquet and Mr. Hoare nor Mr. Marsden has any interest to be protected.  So far as Mr. Hecquet and Mr. Hoare are concerned they have each transferred their shares to Mr. Marsden and, having divested themselves of their beneficial interests of those shares, cannot claim that their interests have been unfairly prejudiced.  As to Mr. Marsden, he has asked to be registered as a member of the company but this has been refused by the directors in exercise of their discretion.  Having taken no steps to obtain rectification of the Company’s register of members under Section 359, Mr. Marsden must be taken to have accepted that the refusal is unchallengeable.  Even if Mr. Marsden does not accept this, it is in fact the case.  He has no prospects of becoming a member of the Company and thus no prospect of having any interest as a member.
10.	I was referred to a number of authorities.  The earliest was Re a Company No 007828 of 1985 (1986) 2 BCC 98,951.  This concerned a challenge to a petition under Section 459 presented by three petitioners.  They relied upon a transaction which, they claimed, gave rise to a constructive trust in their favour.  They argued that this amounted to a transmission by operation of law, so bringing them within Section 459(2).  Harman J rejected this argument.  He said (at page 98,954)
“In my view, transmission by operation of law means some act in the law by which the legal estate passes even though there be some further act (such as registration) to be done; and in my view the mere allegation that there arises a constructive trust … cannot possibly amount to a transmission by operation of law.”
11.	The next case is Re a Company [1986] BCLC 391, where Hoffmann J struck out the name of one of two petitioners on the ground that he had no standing.  Dealing with an argument that he had an agreement with the other petitioner for the transfer of that petitioner’s shares to him brought him within Section 459(2), Hoffmann J said
“In my judgment the word ‘transferred’ in s. 459(2) requires at least that a proper instrument of transfer should have been executed and delivered to the transferee or the company in respect of the shares in question.  It is not sufficient that there should be an agreement for transfer.”
12.	These authorities have, in my view, no more than a peripheral bearing on the issue which I have to determine.  More pertinent are two more recent decisions, namely Atlasview v Brightview [2004] 2 BCLC 191, a decision of Mr. Jonathan Crow, sitting as a Deputy High Court Judge, and Baker v Potter [2004] EWHC 1422 (Ch), a decision of David Richards J.  It so happens that both these cases were argued at much the same time in February 2004, judgment in Atlasview being given on 6th April and judgment in Baker v Potter being given on 17th June 2004.  Neither decision was therefore cited in the other case.
13.	The material part of the decision in Atlasview concerns an argument that the third petitioner, JGR, could not succeed on a petition under Section 459 because, although it was a member of the company, it held its shares as a bare nominee.  It was argued that JGR could not complain of any prejudice to its interests because, as a bare nominee, it had no economic interest in the value of the shares registered in its name.  In paragraph 35 of his judgment Mr. Crow summarised this argument and the factors relied upon as supporting it and continued as follows:
 “36.  Even accepting the truth of all these various factors, the legal submission which they are said to support is in my judgment plainly wrong.  The ‘interests’ which s.459 is able to protect include matters going beyond the economic interests of the legal owner of the shares registered in his name …
37.  It is striking that this specific point, relating to a nominee shareholder as petitioner, seems never to have been argued or decided before.  However it is also striking that numerous cases have been decided on the assumed basis that a nominee shareholder is fully entitled to complain under s.459 about any diminution in value of the shares registered in its name, and that its ‘interests’ are for these purposes co-extensive with the interests of the beneficial owner …”
	Mr. Crow mentioned a number of authorities, one of them (Lloyd v Casey [2002] 1BCLC 454) a decision of my own, and continued
“It is, I suppose, entirely possible that all the learned counsel and judges involved in those cases … completely [missed] a knock-out point, but it seems highly unlikely.  More probably, the point was never taken in any of those earlier cases because it is simply wrong.
38.  For the purposes of this strike out application, all I have to decide is whether it is properly arguable that the ‘interests’ of a nominee shareholder under s.459 are capable of including the economic and contractual interests of the beneficial owners of the shares.  In my judgment, based on both the language of s.459 and the authorities mentioned above, I consider it to be well arguable: indeed, if I had to decide the point, I would find that it was correct.”
14.	It is important to note that, as Mr. Crow mentioned, the issue came before him on an application to strike out, not to determine a preliminary issue.  Accordingly he was not required to  determine the ‘interests’ point definitively, although the view which he expressed was a strong one and, if it did not decide the point definitively, fell little short of doing so.  More importantly Mr. Crow was not limited to consideration of the standing of JGR to present the petition.  He had to consider also whether it was arguable that JGR could show prejudice to its interests as a member of the company. The fact that he discussed the ‘interests’ point does not, therefore, indicate acceptance on his part that a petitioner will have standing only if he can show prejudice to his interests.
15.	Baker v Potter concerned a company in which there were only two shareholders,  Mr. Baker and Mr. Potter, each of whom held one share.  Mr. Baker petitioned for relief under Section 459, alleging various acts of unfairly prejudicial conduct.  Mr. Baker counterclaimed for specific performance of an alleged oral agreement for the purchase of Mr. Potter’s share.  For present purposes the material parts of the judgment of David Richards J are contained in paragraphs 2 and 3, where he said:
“2.	It is necessary to consider the relationship between Mr. Potter’s claim for relief under section 459 and Mr. Potter’s claim for specific performance of the alleged agreement to purchase Mr. Baker’s share.  I should say now that, for the reasons set out in detail in this judgment, I have concluded that the oral agreement was made, as alleged by Mr. Potter.  However, Mr. Baker is still the registered holder of his share and therefore, as a member, has standing to make a claim under section 459.  He has not on any view been paid the entire purchase price for his share, and, if he could establish actual or threatened acts of unfair prejudice, he might well be entitled to injunctive relief in order to protect the value of his shareholding and his rights as shareholder, pending completion of the sale and as a precaution if the sale is not completed.
3.	The position is, however, rather different with respect to any financial relief.  By agreeing to sell his share to Mr. Potter, Mr. Baker has converted his interest in the company into a right to receive the purchase price from Mr. Potter.  If there had been any improper extraction of funds or other assets from the company by Mr. Potter before the sale agreement, there might be a case for financial relief in favour of Mr. Baker, notwithstanding the agreement.  The agreement would not itself amount to a waiver of any accrued rights.  Financial relief is not however appropriate in respect of the alleged unfairly prejudicial acts or conduct which occurred after the agreement.  Provided he is paid the agreed price for his share, he will have suffered no prejudice.  This position might well change if Mr. Potter were unable or refused to complete and the contract were terminated.”
16.		Later, after considering the acts of unfair prejudice alleged by Mr. Baker, David Richards J concluded that only one, relating to the ownership of a property, was made good as a matter of fact,.  As to that he said (in paragraph 118 of his judgment):
“If there had been no contract for the sale of Mr. Baker’s share, Mr. Baker’s complaint [as to the ownership of the property] would have been well-founded.  However, the existence of the contract of sale, and Mr. Potter’s willingness to complete it, mean that these matters have caused no prejudice to Mr. Baker as a member.  Accordingly, I dismiss Mr. Baker’s petition.”
17.	Mr. Cunningham submitted that what David Richards J had said in paragraphs 3 and 118 of his judgment showed that there is more to the issue of standing to maintain a petition under Section 459 than mere satisfaction of the formal requirements of the Section and that damage to the petitioner’s interests is an essential element.  He had to recognise that the statement in paragraph 2 that 
“Mr. Baker is still the registered holder of his share and therefore, as a member, has standing to make a claim under section 459”
	was, on the face of it, against his contention, but he said that paragraphs 3 and 118 showed that David Richards J considered that something more than this had to be shown.  He accepted also that, if this is so, there is a conflict between the view of David Richards J and that of Mr. Jonathan Crow in Atlasview.
18.	I do not accept these contentions.  It has to be remembered that David Richards J was giving judgment after the trial of the petition and counterclaim.  He had, therefore, to consider whether all the requirements for granting relief under Section 459 were satisfied, not just the question of Mr. Baker’s standing.  His conclusions that (i) Mr. Baker had standing to petition but (ii) that his petition must fail because he had not shown prejudice to his interests are, if I may say so, entirely consistent with each other and with the terms of the Section.  Further I cannot regard his conclusion that Mr. Baker had not shown prejudice to his interests as establishing the general proposition that every member who has sold his shares but remains registered as a member will inevitably be unable to show such prejudice.  The crucial fact as regards Mr. Baker was that he had sold his shares to Mr. Potter, the only other shareholder.  It would have been different if the shares had been sold to a third party.
19.	I add that I see no inconsistency between the passages which I have cited from the judgment of David Richards J and those I have cited from the judgment of Mr. Crow.
20.	Mr. Cunningham’s arguments on the basis of Baker v Potter were directed mainly, if not entirely, to the standing of Mr. Hecquet and Mr. Hoare.  As to Mr. Marsden, Mr. Cunningham accepted that a transferee whose name has not yet been entered in the register of members would, immediately after the transfer, satisfy the formal requirements in respect of standing.  He accepted that Mr. Marsden derives some support from the statement of Harman J in Re a Company No 007828 of 1985 (1986) 2 BCC 98,951. that
“transmission by operation of law means some act in the law by which the legal estate passes even though there be some further act (such as registration) to be done”
	But he pointed out that Harman J was not dealing with a case where registration has been applied for and refused under an Article equivalent to Article 7 of the Company’s Articles. 
21.	Mr. Cunningham claimed to obtain some comfort from the words “at least” in the judgment of Hoffmann J in Re a Company [1986] BCLC 391 when he said 
“the word ‘transferred’ in s. 459(2) requires at least that a proper instrument of transfer should have been executed and delivered to the transferee or the company in respect of the shares in question.”
Hoffmann J thus accepted that something more than a duly executed and delivered transfer might be required.
22.	In any event there is an additional element in the present case, said Mr. Cunningham, in that Mr. Marsden has applied for registration as a member and has been refused.  The remedy for someone who complains of such a refusal is an application for rectification of the register under Section 359.  Mr. Marsden has not sought rectification and, on the facts, would be unlikely to obtain it if he did so, the discretion of the directors under Article 7 being unfettered.  Mr. Marsden has no prospect of being registered as a member.  He cannot maintain that his “interests” have been prejudiced, for he has none.
23.	In my judgment this additional element does not deprive Mr. Marsden of standing.  Mr. Cunningham’s argument appeared to me to be tantamount to saying that refusal to register is equivalent to cancellation of the shares transferred.  Clearly this is not the case.  The voting rights attached to the shares remain on foot and, if it be the case that Mr. Hecquet and Mr. Hoare are bare trustees of the shares for him, Mr. Marsden is entitled to direct how those rights are to be exercised.  Likewise if a dividend were declared Mr. Marsden would be entitled to receive it, albeit via his trustees.  The scope of the proposition propounded by Mr. Cunningham defies accurate definition.  Mr. Cunningham has to accept that a transferee must have standing to petition for a period after the time of the transfer but before registration, otherwise section 459 (2) would have no effect.  How long is that period?  What would the position be if the transferee legitimately postpones the making of an application for registration?  What if a transferee, having been refused registration, renews his application, perhaps after a change in the composition of the board?  How would matters stand if the refusal to register were itself relied upon as unfairly prejudicial conduct?  I see no satisfactory answers to these questions.
24.	As an alternative argument Mr. Cunningham contended that it cannot be right that two distinct categories of petitioner, namely members and transferees, have concurrent standing to petition by virtue of the same shares and the same unfairly prejudicial conduct.  But there is nothing in the Act to provide this.  Obviously in a particular case, if unfairly prejudicial conduct were established, some care might need to be exercised in order to prevent double recovery in respect of the same injury.  But any anomaly resulting from allowing two distinct categories of petitioner to proceed is, in my judgment, more apparent than real.  Mr. Cunningham’s own argument, if it were correct, would present a much greater anomaly, namely that, where shares have been transferred but the transferee has been refused registration, no one can complain of unfairly prejudicial conduct, however damaging or extreme it may be.  This cannot be right.
25.	Accordingly I reject Mr. Cunningham’s arguments and find that Mr. Hecquet and Mr. Hoare and Mr. Marsden all have standing to maintain this petition.